The New York Post, of all publications, had a comprehensive article yesterday about the meteoric growth of Washington Mutual and the decisions it’s made that may spell its demise as an independent bank:

To many the situation is looking increasingly dire for WaMu, especially in the wake of the stunning collapse of IndyMac Bank last month. WaMu shares have fallen 85 percent in the past year, wiping out some $60 billion in market capitalization.

AND while it’s hard to believe that WaMu will face a similar fate as IndyMac - given its $180 billion-deposit base, its most recent capital-raising initiatives and its mix of assets - many Wall Streeters are uncertain about its fate as conditions continue to worsen in some of WaMu’s key markets in California and Florida.

“I don’t see Washington Mutual failing the way IndyMac did,” said Alexandria, Va., banking consultant Bert Ely at Ely & Co. “But it’s looking less and less likely that they’ll remain independent.”

(Sorry about the lack of posts last week. These are busy times.)

The Predatory Lending Association: “Helping payday lenders extract maximum profit from the working poor.”

…in the form of 56,000 comments received by the Federal Reserve during the comment period for proposed new regulations that would impose new restrictions on the abusive practices of credit card issuers. The comment period, which ended August 4, saw a record number of responses come in to the Fed, almost all in support of the proposed regulations.

The comments file is public information and can be accessed here. It’s sobering to pick a few at random and read the individual stories of ordinary, fiscally responsible Americans who’ve gotten fed up at the capricious and punitive way they’re treated by these companies. With this kind of response, these new regulations seem all but certain to be approved. Democracy in action!

This is the fourth in a series of weekly posts examining the positions of the major presidential candidates on bankruptcy, debt, and personal finance issues. This week, we’ll look at the candidates’ positions on predatory lending practices that trap unsuspecting borrowers into expensive and unnecessary debt. (Many of the other issues covered in this series include predatory lending aspects as well, so consider reviewing the candidates’ positions on bankruptcy, foreclosure, and credit card issues for the full story.)

Barack Obama (Issues Page)

Senator Obama supports a 36 percent APR interest cap on consumer debt. This is an interesting position in light of his response to Hillary Clinton at a January 2008 debate, which I wrote about last week, in which he explained a 2005 vote against a 30 percent cap on interest rates for credit cards and other consumer debt by saying he thought 30 percent was too high. However, it’s worth pointing out that Obama discusses this 36 percent cap specifically in the context of payday loans, which can achieve APRs as high as 5000 percent—amounting to just a few dollars over the course of a typical payday loan, but quickly becoming ruinous for someone who becomes trapped in the cycle of taking out new loans to pay off old ones. Obama would also require lenders to provide borrowers with clear and simplified information about fees, payments, and penalties during the application process, to make it harder for lenders to use “fine print” against borrowers.

During the primary season, Americans for Fairness in Lending (AFFIL) asked the candidates to endorse its statement of principles demanding reform in the credit industry. Obama endorsed the statement on September 25, 2007, saying “I am proud to support the important efforts of [AFFIL] to empower more Americans in the fight against consumer fraud and abusive lending practices.”

John McCain

Senator McCain hasn’t addressed predatory lending specifically, earning blasts from the Obama campaign over what they characterize as his inaction on the issue. His mortgage proposals do include provisions for homeowner relief from unmanageable loans in some circumstances, and a task force to investigate and punish criminal wrongdoing in the mortgage industry.

For insight into a potential McCain administration’s possible attitude toward predatory lending, we might turn to his chief economic advisor, former Senator Phil Gramm. McCain, who told the Boston Globe last year that “the issue of economics is not something I’ve understood as well as I should,” has all but ceded control of his campaign’s economic message to Gramm (who was forced to resign as McCain’s campaign co-chairman last month after his “nation of whiners” remark, but still advises the campaign on economic issues). Gramm was a staunch opponent of predatory lending protections when he was in the Senate, blocking several efforts to rein in some of the lending industry’s more outrageous abuses. “In Washington the buzzword today is predatory lending,” the always-quoteworthy Gramm said in 2001, “but there are predatory borrowers.”

AFFIL has asked McCain to endorse its statement of principles, but he has not done so.

Coming next week: The Candidates on Student Loan Issues

An interesting tidbit from one of the articles I linked to in my earlier post about option ARMs. From Slate, April 15, 2008:

Just two banks, Washington Mutual and Countrywide, wrote more than $300 billion worth of option ARMs in the three years from 2005 to 2007, concentrated in California. Others—IndyMac, Golden West (the creator of the option ARM, and now a part of Wachovia)—wrote many billions more.

IndyMac Bank failed last month. Countrywide Financial was on the brink of collapse in January when Bank of America announced that it would buy the failing lender. Shares in Wachovia, which absorbed Golden West, plummeted today after an analyst advised investors to sell. Fully one-fourth of Wachovia’s entire loan portfolio consists of option ARMs.

That leaves one…

“The first wave of Americans to default on their home mortgages appears to be cresting,” writes Vikas Bajaj in this morning’s New York Times, “but a second, far larger one is quickly building.”

Homeowners with good credit are falling behind on their payments in growing numbers, even as the problems with mortgages made to people with weak, or subprime, credit are showing their first, tentative signs of leveling off after two years of spiraling defaults.

The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time.

What’s especially interesting is how closely the scenario outlined in the Times article matches up with this chart, published last year by the International Monetary fund using data from Credit Suisse, showing the value of mortgage rate resets due to happen each month between 2007 and 2015. (A reset is when the repayment terms of a loan change—invariably by increasing—according to a schedule determined by the loan contract.)

Earlier this decade, as the ballooning housing market pushed the affordability index past the point where the average first-time homebuyer could afford a typical home in many areas, the real-estate industry kept the boom going by offering “teaser-rate” mortgages. These loans had artificially low annual percentage rates that were only good for the first few years of the contract, after which they would reset to a much higher APRs that the buyers in many cases would not be able to afford. As long as housing prices kept going up, the story went, buyers would be able to use the increased equity in their homes to refinance into more affordable loans. Then housing prices stopped going up.

As the IMF graph shows, the problem began a couple of years ago with a huge wave of resets in the subprime market, giving rise to talk about the so-called “subprime crisis.” It has been the failure of these loans that has been responsible for much of the turmoil in the housing market over the past couple of years. By early 2009, however, most of the subprime resets will be over and done with. Then, beginning in early 2010 and continuing for a couple of years, there will be another big wave of resets, this time in alt-A and option ARMs.

As this scarily prophetic Business Week article from nearly two years ago puts it, option adjustable rate mortgages — the so-called “pick-a-payment” mortgages — “might be the riskiest and most complicated home loan product ever created.” Option ARMs offer several payment choices each month, typically differing by thousands of dollars. The least expensive option doesn’t even cover the full amount of the interest due on the loan, so the leftover interest gets added to the principle (a situation called negative amortization). Option ARMs sold like hotcakes during the boom, accounting for 9 percent of the volume of all mortgages sold in the US in 2006, and significantly more in boom states like California and Florida.
According to Standard & Poor’s, more than 75 percent of option ARM holders were making only the minimum monthly payment in 2007.

Those attractive payment options come to an end when the mortgage resets. Faced with a monthly payment that’s nearly double what they’ve been making, a debt that’s tens of thousands of dollars bigger than it was when they took it out, and a home that may be worth less than their outstanding debt by a wide margin, many homeowners will be forced to default or to seek protection in bankruptcy court.

Option ARMs, it can’t be pointed out often enough, are prime loans, not subprime. As today’s Times article notes, prime and alt-A loans make up a much bigger percentage of most banks’ mortgage portfolios than subprime loans do, raising the specter of a new wave of defaults that may dwarf the troubles we’ve already seen:

“Subprime was the tip of the iceberg,” said Thomas H. Atteberry, president of First Pacific Advisors, a investment firm in Los Angeles that trades mortgage securities. “Prime will be far bigger in its impact.”

Good news from the other Washington: The Credit Cardholders’ Bill of Rights, which would outlaw some of the worst abuses of the credit card industry, passed the House Financial Services Committee yesterday by a vote of 39 to 27, surviving an effort by Rep. Mike Castle (R-Del.) to kill it. The bill now goes to the full House for a vote.

It’s not a perfect bill, but it’s a good start. See this February post at Credit Slips for a good overview of the bill.

This is the third in a series of weekly posts examining the positions of the major presidential candidates on bankruptcy, debt, and personal finance issues. The first two posts covered bankruptcy and foreclosure issues. This week, let’s take a look at another issue that’s at the front of a lot of consumers’ minds: credit cards.

Barack Obama (Issues Page)

Senator Obama has two major planks that address abusive credit card issuer practices. The first of these is a “Credit Card Bill of Rights,” which would ban unilateral changes, apply interest rate increases to future debt only, prohibit interest on fees, prohibit universal default (a controversial practice in which a lender can change the terms of your debt if you default with a different lender), and require prompt and fair crediting of payments.

Obama also proposes a five-star rating system that would give consumers an easy-to-understand metric of the risk involved in different credit cards. He charges credit card issuers with making their terms too difficult for the average consumer to understand, which makes it difficult or impossible to make an educated, rational decision. Credit card companies would be required to display this rating on all application and contract materials, “enabling consumers to quickly understand all of the major provisions of a credit card without having to rely exclusively on fine print in lengthy documents.”

In a January debate, Senator Hillary Clinton criticized Obama for voting against an amendment to the 2005 bankruptcy bill proposed by Sen. Mark Dayton (D-Minn.) that would have imposed a ceiling of 30 percent on interest rates for credit cards and other consumer debt. “I thought 30 percent potentially was too high of a ceiling,” Obama explained. The amendment failed, and there is still no federally-imposed ceiling on interest rates to this day. Obama did vote against the harshly punitive bankruptcy bill as a whole, as covered here two weeks ago.

Obama talked about credit card issues in his July 8 economic speech in Georgia, starting at about the 12 minute mark:

John McCain

Senator McCain has taken no position on credit card issues during the presidential campaign, and apparently does not intend to. Obama charges that McCain “sides with the credit card companies,” citing his opposition to a 1998 effort to require to require credit card companies to affirmatively determine that borrowers under 21 could handle any debts they might incur before issuing them cards, and to a 2005 bill to require issuers to inform borrowers on their monthly statement that making the minimum payment would increase the interest they’d have to pay and the time it would take to pay their debt off. McCain criticizes Obama for his vote on the Dayton amendment discussed above, but that criticism is more than a little bit disingenuous, because McCain also voted against the amendment.

Then again, considering the $1.37 million debt on the McCain campaign’s American Express card—a card that apparently carries a 17 percent annual percentage rate—maybe a McCain administration would bring some needed perspective to the issue of abusive credit card practices. And then there’s the personal credit card with a 25.99 percent APR…

Coming next week: The Candidates on Predatory Lending

A few more highlights from the package of articles and features on the debt crisis from Sunday’s New York Times, which I first wrote about on Monday.

“Borrowers and Bankers: A Great Divide” is an analysis of the differences in how the federal government has responded to the financial woes of lenders and investors like Bear Stearns, Fannie Mae, and Freddie Mac (bailouts) vs. those of ordinary borrowers (you’re on your own), and explains some of the reasons behind the discrepancy.

“Work Out Problems with Lenders? Try to Find Them” talks about something I’ve written about in the past: mortgages are sliced and diced into securities and traded among big investors so much that people who want to work out payment terms with their lender are having difficulty even figuring out who they should be contacting. (I would be remiss if I did not point out that a good bankruptcy attorney can help you with this!)

In fact, as Sunday’s front-pager notes, it’s not just mortgage lenders who have been securitizing and trading consumer debt in recent years: credit card issuers have gotten into the act as well. The result has been the creation of a system in which lenders increasingly don’t even care if borrowers will ever be able to pay their debts in full. Securitization allows lenders to see an immediate return on investment (ROI) for issued debt instead of waiting years for the borrowers to pay it off, but it also means that they’re far less concerned with ensuring that borrowers can pay their debts off in full over the long run—as long as borrowers remain current until the lender unloads their promissory note onto someone else, the theory goes, all is well.

The lending industry has become a huge, nationwide game of Hot Potato, which worked well enough in good economic times, but as the economy has faltered we’ve started to see some of the huge problems that exist with a lot of these loans, and the so-called subprime mortgage crisis is looking more and more like it’s just the tip of the proverbial iceberg.

This is the second in a series of weekly posts examining the positions of the major presidential candidates on bankruptcy, debt, and personal finance issues. Last week’s post, in cased you missed it, dealt with individual bankruptcy. This week, it’s time to look at where the candidates stand on mortgage and foreclosure issues.

Barack Obama on the Mortgage Crisis (Issues Page)

Sen. Obama’s mortgage plan focuses on increasing the transparency of the lending business and giving borrowers more options for relief from onerous loans.

Sen. Obama proposes to make it easier for borrowers to obtain and understand information about the mortgage products available to them, creating “a simplified, standardized borrower metric (similar to APR)” for home mortgages. A 10 percent universal mortgage credit would apply to homeowners who don’t itemize their deductions; Obama says this would equal an average of $500 a year for 10 million homeowners. Obama would also create a fund to help homeowners escape foreclosure through refinancing, funded in part by penalties on fraudulent lenders.

Obama was an early critic of mortgage fraud and abusive lending practices. With Sen. Richard Durbin (D-Ill.), he sponsored the Stopping Transactions which Operate to Promote Fraud, Risk, and Underdevelopment (STOP FRAUD) Act, which would criminalize mortgage fraud on the federal level and increase funding to federal and state law enforcement to fight it. The STOP FRAUD Act is currently in committee and has not become law. He also proposes allowing bankruptcy courts to modify the mortgage payment of an individual in bankruptcy; Obama calls the current bankruptcy law “outdated” and says that it shields the subprime mortgage industry from the consequences of its “dangerous and sometimes unscrupulous” business practices.

John McCain on the Mortgage Crisis (Issues Page)

Sen. McCain’s main mortgage-related plank calls for a “HOME Plan” that would help distressed homeowners trade in an unmanageable mortgage for a less expensive one with payments they can afford. McCain’s plan would have more restrictive terms than Obama’s: eligibility is limited to “[h]olders of a non-conventional mortgage taken after 2005 who live in their home (primary residence only); can prove creditworthiness at the time of the original loan; are either delinquent, in arrears on payments, facing a reset or otherwise demonstrate that they will be unable to continue to meet their mortgage obligations; and can meet the terms of a new 30-year fixed-rate mortgage on the existing home.” The part about proving creditworthiness is a bit troubling: What happens to people who were duped by predatory lenders into taking on mortgages they couldn’t afford? It’s not clear. McCain’s plan also involves lenders voluntarily agreeing to write down delinquent mortgages to the current market value of the home, which lenders have not historically shown a great willingness to do.

On the law & justice front, McCain has called for the Justice Department to form a Mortgage Abuse Task Force to investigate potential criminal wrongdoing in the mortgage industry and prosecute any offenders. The task force would also offer assistance to state attorneys general as they investigate and prosecute mortgage abuse cases on the local level.

For more on the candidates’ proposals and differences on mortgage-related issues, watch this video report from the Associated Press:

Coming next week: The Candidates on Credit Card Issues